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Levels
By Carolyn Boroden
In this first tutorial, we are going to start with how we apply these ratios to
price levels.
Number Series:
0,1,1,2,3,5,8,13,21,34,55,89,144,233, etc.
This series starts with zero and one and goes on to infinity by adding the prior
two numbers to get the next number in the series. Thus:
0+1=1
1+1=2
1+2=3
2+3=5
3+5=8
and so forth...
As you move further out in the series, the constant that is found when you divide
one number by the next is the ratio of .618 or what is commonly known as the
“golden ratio."
This ratio, and others derived from it, is actually what I use to analyze the market.
You may be wondering what in the world is the significance of these ratios? Well,
we won't get into that here because we can get into some rather lengthy
discussions. What is most important about these ratios is not where they come
from and why they work…but the fact that they continually show up in both
nature and the marketplace.
The ratios that I have found work best in my analysis are:
There are three types of price calculations we make from the key highs and lows
in a particular market. These are price retracements, price extensions and
price projections or objectives.
(The following chart examples were done on a 60-minute soybean chart of the
November 2000 contract (SX0))
This methodology can be applied to both stocks and futures and all time
frames therein. It works very well in all liquid stocks, stock indexes and
commodities with adequate price history.
In the following example, we measured the swing from the 515 1/2 high to the
488 low (27 1/2 cents). We then project rations calculated from this swing from
the 508 1/2 swing high. To calculate the ratios, we multiplied 27 1/2 cents by
.618, 1.0 and 1.618, which equals 17, 27 1/2 and 44 1/2 cents, respectively. We
then then projected these results from the swing high by subtracting from 508
1/2 (for example: 508 1/2 - 17 cents = 491 1/2, or the .618 price projection). This
gives us price projections of 491 1/2, 481 and 464.
So now that we have all these price calculations and levels all over the
chart...which ones do we use to take a trade against?
Here are my preliminary criteria for determining whether I have a trade worth
considering.
In the following chart, we can see that this "confluence" or cluster of price
relationships within this zone put in a healthy low in the November soybean
contract. The actual low was made at 482 and the rally that followed took this
contract to 502 3/4 within a week and a half.
Note that this is an example of the first and most powerful way we qualify the
Fibonacci price relationships we use for trading. The other methods will be
discussed in a future lesson. :)